A Study on Impact of Liquidity on Returns of Four Government Bonds in the Context of Indian Bond Market

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Asian Review of Social Sciences ISSN: 2249-6319 Vol. 8 No. S1, 2019, pp. 71-74

A Study on Impact of Liquidity on Returns of Four Government Bonds in the Context of Indian Bond Market

HimaVincent

Prajyoti Niketan College, Pudukkad, Kerala, India E-Mail: [email protected]

Abstract - A well-developed capital market consists of equity and bond market. A sound bond market with a significant role played by the Government bond market segment is considered to be important for an efficient capital market and raising for developmental ventures. Bonds are issued and sold to the public for funds. Bonds are interest bearing debt certificates.

This study is conducted in order to analyze the impact of liquidity on return of government securities in the context of Indian bond market.

Keywords: Bond Market, Bond, Bond Yield, Liquidity Amihud Mendelson Model, Linear Regression.

I. INTRODUCTION

The Indian financial system is changing fast, marked by strong economic growth, more robust markets, and considerably greater efficiency. While the government and corporate bond markets have grown in size, they remain illiquid. The bond market, in addition, restricts participants and is largely arbitrage-driven.

To meet the needs of its firms and investors, the bond market must therefore evolve. The bond market in India has diversified to a large extent and that is a huge contributor to the stable growth of the economy. The debt market in India consists of mainly two categories the government securities or the G-Sec markets comprising central government and state government securities, and the corporate bond market.

In order to finance its fiscal deficit, the government floats fixed income instruments and borrows money by issuing G- Sec that are sovereign securities issued by the Reserve Bank of India (RBI) on behalf of the Government of India.

II. STATEMENT OF THE PROBLEM

The study is conducted to analyze the relationship between the two variables that is liquidity and its impact on the returns of selected government bonds. Liquidity is only variable that have to be studied here irrespective of many other factors affecting the returns of government bonds which could be the part of the model to better understand

the returns. This study has been done in order to gain further insight and assessing the results.

III. SIGNIFICANCE OF THE STUDY

The significance of the study is that there are very less number of work done on this area. So as to verify the association among liquidity and bond return in Indian context in order to create awareness about different characteristics of bond market. An investor can reach to better decision by analyzing various factors affecting the return and liquidity of the bond. By knowing these factors investor may opt or not for the same.

IV. OBJECTIVES OF THE STUDY

1. To analyze the relationship between bond yield and liquidity of selected government bonds.

2. To measure the average yield in the last four years and to assess Amihud’s price impact factor of liquidity on the of selected government bonds.

V. RESEARCH DESIGN

This study is based on the market data relating to four government bonds collected from NSE for the period of 4 years (2013-16). A clear analysis has been made with the help of analytical tools, graphs and tables which provide useful and meaningful information.

Mean, standard deviation, coefficient of variation, Regression analyses were done to identify the relationship between return and liquidity in this study.

VI. SCOPE OF THE STUDY

The scope is limited to the period from 2013 to 2016 of four government bonds collected from NSE.

71 ARSS Vol.8 No.S1 February 2019

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VII. DATA ANALYSIS AND INTERPRETATION TABLE IGOVERNMENT BOND 7.46%

Date Security Type

Security Name

Issue Name

Traded Value

Low Price/

Rate

High Price/

Rate LTP

29-Apr-13 GS CG2017 7.46% 20 99.52 99.52 99.52

22-May-13 GS CG2017 7.46% 10 100.3797 100.3797 100.3797 5-Sep-13 GS CG2017 7.46% 5 95.5799 95.5799 95.5799 10-Sep-13 GS CG2017 7.46% 5 95.527 95.527 95.527 20-Nov-13 GS CG2017 7.46% 10 96.6855 96.6855 96.6855

3-Mar-14 GS CG2017 7.46% 5 96.051 96.051 96.051

5-Sep-14 GS CG2017 7.46% 10 97.4538 97.4538 97.4538 7-Nov-14 GS CG2017 7.46% 25 98.2123 98.2123 98.2123

26-Nov-14 GS CG2017 7.46% 25 98.3 98.3 98.3

10-Dec-14 GS CG2017 7.46% 25 98.783 98.783 98.783

TABLE II 7.49%

Issue Name

Low Price/

Rate

High Price/

Rate LTP

25-Feb-13 GS CG2017 7.49% 100 98.734 98.734 98.734

6-Mar-13 GS CG2017 7.49% 10 98.68 98.68 98.68

12-Mar-13 GS CG2017 7.49% 95 98.5109 98.5109 98.5109

13-Mar-13 GS CG2017 7.49% 5 98.6 98.6 98.6

21-Mar-13 GS CG2017 7.49% 15 98.5 98.5211 98.5211

22-Mar-13 GS CG2017 7.49% 5 98.4 98.4 98.4

9-Apr-13 GS CG2017 7.49% 75 98.845 99.08 99.08

17-Apr-13 GS CG2017 7.49% 25 99.2551 99.2551 99.2551

21-Jun-13 GS CG2017 7.49% 40 99.46 99.46 99.46

28-Jun-13 GS CG2017 7.49% 5 99.2 99.2 99.2

TABLE III 7.99%

Issue Name

Low Price/

Rate

High Price/

Rate LTP

3-Jan-13 GS CG2017 7.99% 10 99.99 99.99 99.99

9-Jan-13 GS CG2017 7.99% 5 100.18 100.18 100.18 17-Jan-13 GS CG2017 7.99% 35 100.33 100.33 100.33 22-Feb-13 GS CG2017 7.99% 100 100.495 100.495 100.495

7-Mar-13 GS CG2017 7.99% 420 100.34 100.39 100.36 15-Mar-13 GS CG2017 7.99% 15 100.46 100.46 100.46 19-Mar-13 GS CG2017 7.99% 15 100.31 100.31 100.31 20-Mar-13 GS CG2017 7.99% 100 100.18 100.18 100.18 21-Mar-13 GS CG2017 7.99% 50 100.18 100.18 100.18

Hima Vincent

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TABLE IV 8.07%

Date Security Type Security Name Issue Name Traded Value Low Price/Rate High Price/Rate LTP

2-Jan-13 GS CG2017 8.07% 10 100.46 100.46 100.46

18-Jan-13 GS CG2017 8.07% 60 100.84 100.84 100.84

21-Jan-13 GS CG2017 8.07% 25 100.5682 100.5682 100.5682

22-Jan-13 GS CG2017 8.07% 35 100.6096 100.6096 100.6096

30-Jan-13 GS CG2017 8.07% 100 100.65 100.65 100.65

6-Feb-13 GS CG2017 8.07% 200 100.3574 100.3574 100.3574

18-Feb-13 GS CG2017 8.07% 100 100.5 100.5 100.5

20-Feb-13 GS CG2017 8.07% 125 100.65 100.65 100.65

22-Feb-13 GS CG2017 8.07% 100 100.735 100.778 100.778

14-Mar-13 GS CG2017 8.07% 50 100.569 100.569 100.569

15-Mar-13 GS CG2017 8.07% 20 100.715 100.715 100.715

A. Return Has Been Calculated In Here by the Following Formula

Return= P₁-P₀/ P₀

Liquidity is calculated by ABS return/value traded *10⁷ TABLE V7.46%BOND

Date Return Illiquidity

29-Apr-13 0 0

22-May-13 0.008638465 0.086384646 5-Sep-13 0.047816441 0.956328819 10-Sep-13 0.000553464 0.011069273 20-Nov-13 0.012127461 0.121274613

3-Mar-14 0 0

5-Sep-14 0.014604741 0.146047412 7-Nov-14 0.007783175 0.031132701 26-Nov-14 0.000892964 0.003571854 10-Dec-14 0.00491353 0.01965412

TABLE VI 7.49%BOND

Date Absolute Return Amihud Illiquidity

25-Feb-13 0 0.00E+00

6-Mar-13 0.000546924 0.005469241 12-Mar-13 0.00171362 0.00180381 13-Mar-13 0.000904468 0.018089369 21-Mar-13 0.000800203 0.005334686 22-Mar-13 0.001229178 0.024583566 9-Apr-13 0.006910569 0.009214092 17-Apr-13 0.001767259 0.007069035 21-Jun-13 0.002064378 0.005160944 28-Jun-13 0.002614116 0.052282325

B. Regression Analysis

Regression analysis can be analyzed to know about the relationship between liquidity and return and to know the significance of return and illiquidity.

TABLE VII 7.46%BOND

Coefficient

Model Unstandardized Coefficients Standardized Coefficients

T Sig.

B Std. Error Beta

1

(Constant) .002 .001 2.646 .014

Amihud

Illiquidity .051 .004 .925 12.162 .000

a. Dependent Variable: Absolute Return TABLE VIII 7.49%BOND

Coefficient

t Sig.

1 (Constant) .002 .001 4.033 .000

AmihudIlliquidity .024 .011 .234 2.260 .026

a. Dependent Variable: AbsoluteReturn

A Study on Impact of Liquidity on Returns of Four Government Bonds in the Context of Indian Bond Market

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TABLE IX 7.99%BOND

Coefficient

t Sig.

1 (Constant) .002 .000 4.313 .000

a. Dependent Variable: AbsoluteReturn

TABLE X8.07%BOND

Coefficient

t Sig.

1 (Constant) .002 .000 4.001 .000

a. Dependent Variable: Absolute Return

It means illiquidity decreases, the return of bond increases.

The higher beta coefficient of 7.46% bond compared to other three government bonds shows that the illiquidity has more impact on 7.46% bond than others.

VIII. FINDINGS OF THE STUDY

1. The Indian corporate bond market is in a developing stage.

2. The relationship between return and illiquidity is significant as per Amihud illiquidity measure so here the relationship between return and liquidity is also significant for all the four government bonds.

3. 7.46% bonds are more volatile and inconsistent as compared to other bonds.

4. Coefficient of variation is more for 7.99% bond (0.6016) that of 7.49% bond have (0.5430) so 7.49% Bonds are more stable.

5. Illiquidity and return shows a positive relationship that is lower the return higher the illiquidity. This means there is a negative relationship between return and liquidity.

6. An investor aiming for a stable return should opt for 7.49%

bonds over others.

7. The bond market still has to improve and thus it needs more growth like that of the stock market.

8. Range of return of bonds is more for 7.46% which shows more variation. Thus 7.49% is more stable and it is having only less range compared to other government bonds.

IX. CONCLUSION

From this study we can reach to a conclusion that both the bonds are having significant relationship with return and

liquidity and thus there exist a positive relationship between return and liquidity. For an investor to choose among these bonds he may opt for 7.49% bond over 7.46%, 7.99%, 8.07%bonds because they are volatile and is inconsistent compared to the other. 7.49% security here shows more consistency and stability than others. So for regular and high return investor can choose that security rather than others.

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Hima Vincent